Measuring GDP

The components of GDP

Each of the variables C, I, G and NX (where GDP = C + I + G + (X-M), as above):

(Note: * GDP is sometimes also referred to as Y in reference to a GDP figure)

C is private consumption in the economy. This includes most personal expenditure of households such as food, rent, medical expenses, and so forth, but does not include new housing.

I is defined as business investment capital. Examples of investments made by a company include the construction of a new mine, the purchase of software, or purchase of machinery and equipment for a factory. Household expenditures on new homes is also included in the investment. Unlike in a general sense, "investment" in GDP is very specifically meant that non-financial product purchases. Purchases of financial products, is classified as' saving ', as opposed to investment. The distinction is (in theory) clear: if the money is converted into goods and services, investment, but if you buy a bond or a share of stock, this transfer payment is excluded from the total GDP. Although these purchases would be called investments in normal speech, the economy's total point of view, this is simply the replacement of acts, not part of the real economy or the formula GDP.

G is the sum of government expenditures on final goods and services. It includes the salaries of civil servants, to buy weapons for the military, while investment spending by government. It does not include transfer payments such as social security or unemployment benefits.

X is gross exports. GDP captures the amount a country produces, including goods and services produced for consumption overseas, exports are added. M is crude imports. Imports are subtracted from imported goods will be included in the plan G, I, or C, and must be deducted to avoid counting of foreign and domestic suppliers.

It is important to understand the meaning of each variable.

Examples of GDP component variables

Examples of C, I, G, & NX: If you spend the money to renovate your hotel so that the occupancy rate increase, private investment, but if you buy units of a consortium for do the same thing, it is offering. The first is included when measuring GDP (I), the second is not. However when the consortium conducted its own costs of renovating the expenditure would be included in the GDP.

If the hotel is your private home renovation expenses would be measured by consumption, but if a government agency is converting the hotel into an office for officials of the renovation costs would be measured in the context of spending public sector (G).

If the renovation involves the purchase of a chandelier from abroad, that the expenses would also be recorded as an increase in imports, so that NX fall and the total GDP is unaffected by the purchase. (This highlights the fact that GDP is designed to measure domestic production rather than consumption or total expenditures. Spending is really a convenient means of estimating production.) If you are paid to manufacture the chandelier to hang in a foreign hotel, the situation is reversed, and the payment you receive will be counted in NX (positively, as for export). Again, we see that GDP is an attempt to measure the production through the means of spending, if you shine had been purchased locally, it would have been included in the figures of GDP (C / I) at the time with the purchase of a consumer or a business, but because it has been exported, it is necessary to "fix" the amount consumed in the country to give the amount of domestic production.